The stochastic behavior of spot freight rates and the risk premium in bulk shipping

The value of virtually any contract or asset in bulk shipping depends primarily on the stochastic dynamics of the forward freight rate curve. In the absence of a liquid and transparent market for forward freight agreements, the dynamics of the forward freight rate curve must be derived from the dynamics of the spot freight rate and the risk premium in the freight market. This thesis is an attempt to improve our understanding of the stochastic dynamics of freight rates and the nature and sources of risk in the freight markets. Two new spot freight rate models are proposed and estimated, applying nonparametric estimation in an effort to avoid misspecification. It is found that while a one-factor Markovian model can capture the mean reversion and level effect in the spot freight rate very well, an extension to a multi-factor non-Markovian model is required in order to account for the observed lag effects in the conditional mean and variance. New theory governing the risk premium in the freight markets is proposed, which suggests that the theoretical risk premium should be time varying and, in general, depend on the state of the freight market and the duration of the period charter in a systematic fashion. Empirical tests suggest that the implied risk premium changes over time, but are not able to confirm the dependence on the state of the spot freight market.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Ocean Engineering.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2003

Author dc:creator

• Adland, Roar Os, 1972-

Advisor dc:contributor.advisor

• Henry S. Marcus.

• Ocean Engineering.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/29648

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/29648